Prompted by Snap's recent IPO - which was uniquely characterized by its non-voting public shares, and associated institutional investor angst - which was reflected in feedback on the S&P's and FTSE Russell's respective voting rights consultations (see here and here) as well as institutional investor lobbying campaigns, both S&P Dow Jones and FTSE Russell will now restrict multi-class share structure listings.
S&P announced on Monday that - effective immediately - the S&P Composite 1500 and its component indices (S&P 500, S&P MidCap 400, and S&P SmallCap 600) won't add companies with multi-class structures, and the FTSE Russell released last week its plans to effect a minimum 5% of voting rights free-float (aggregated across all of the company's equity securities) eligibility requirement as of its September 2017 and subsequent quarterly and semi-annual index reviews. As such, companies such as Snap and Blue Apron will be excluded from both indices, and companies such as Facebook and Alphabet won't be impacted.
Importantly, existing companies that don't meet the indices' new requirements will be grandfathered in on the S&P Dow Jones, and will have five years (until September 2022) to become compliant on (or be excluded from) the FTSE Russell. Also, as noted in this Davis Polk memo, a newly public company spun off from a current S&P Composite 1500 index company would effectively be grandfathered on the S&P indices as well.
Practically speaking, the FTSE Russell's own analysis (see pages 4 and 6 of its release) shows 37 companies that would fail to meet the planned 5% voting rights hurdle. A hypothetical 25% hurdle - favored by the majority of FTSE Russell consultation respondents who expressed a preference for a minimum voting rights threshold - would exclude numerous additional companies, and appears to be out of consideration at this point. Broader implications, including the potentially adverse impacts of these restrictions on the IPO market, are discussed in Davis Polk's memo.
As previously reported, the MSCI also launched a consultation on the inclusion in its indices of non-voting shares, which remains open through August 31st.
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See also our report in last week's Society Alert: "Institutional Investors Uniformly Oppose Dual/Multi-Class Share Structures," which included a summary of the voting policies on dual/multi-class share structures of the top 10 largest investors and their average support of one-share, one-vote shareholder proposals and related implications; our prior report: "FTSE Russell Launches Voting Rights Consultation"; and additional resources on our Institutional Investors and Capital Allocation/Capital Structure topical pages.
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